Insurance and Real Estate & Retail

VOICES FROM THE INDUSTRY: Charitable trusts: Creating gifts that keep on giving

September 26, 2005

For people who are looking to help a worthy cause, and provide an income stream from a valuable asset, creating a charitable trust may be a good solution.

There are various options for the creation of charitable trusts. At most university and charity Web sites, you'll see a reference to them. They've become a popular way for organizations to build their endowment.

Charitable remainder trusts

With a charitable remainder trust, an individual places assets in the trust-stock, real estate, bonds, etc.-and names an organization as the final recipient. The trust pays an income to the donor for his or her life or for the joint lives of the donor and his or her spouse. CRT assets that meet annuity trust or unitrust requirements won't be included in the donor's estate.

A charitable remainder trust provides a fixed dollar amount with each payment to the beneficiary. This amount corresponds to a percentage of the original investment paid out annually. For example, a $100,000 charitable remainder trust that pays 7.5 percent would pay $7,500 each year for the lifetime of the beneficiary or a fixed period of years.

After the donor's death, the trust's assets go to the charitable recipient. Because there are no capital gains taxes due on appreciated assets placed in the trust, this strategy helps preserve the full value of the gift for the charity and also helps increase the income generated by the principal. Typically, contributions to this type of trust are partially deductible for tax purposes.

Charitable lead trusts

When an individual transfers assets, or principal, to a charitable lead trust, any income generated by the principal goes to a designated organization for the duration of the trust. Upon termination of the trust (typically upon the death of the donor), the assets pass to the donor's beneficiaries.

Leaving something for heirs

Both of the above strategies keep paying income as long as the donor is alive, but the full income stream reverts to the charity after the donor dies.

The following may be one way to give heirs at least a small amount related to those assets when the trust reverts to the organization-if the funds are in a charitable remainder trust.

A wealth replacement trust may be created at the same time as a charitable remainder trust. It works this way. The wealth replacement trust is funded with a life insurance policy on the life of the donor and the premiums are paid with part of the income from the charitable remainder trust. When the donor dies, the death benefit paid to the wealth replacement trust is distributed to the beneficiaries.

How big an asset?

There's a consensus that it's not worth the attorney fees to create a trust with an asset value of less than $100,000. Some recipients suggest that income beneficiaries may be at least 50 years old when payments begin.

How much income?

At most colleges and universities, the trust's average payout is in the neighborhood of 5 percent. The payment is based on whatever is stipulated in the trust document within the limits set by the Internal Revenue Code and the account balance. CRTs are not meant to be high income investments-donors need to diversify.

What's involved?

Creating a charitable trust isn't a speedy or inexpensive process. Setup fees may vary, but most attorneys will charge a flat fee-check with several attorneys with good references to compare. Donors will need a qualified estate attorney-one who works well with their tax professional. Both will have to examine the donor's tax situation and income goals to make sure this idea achieves both goals-what's right for the charity and what's right for the donor.

Checking out the recipient

Most established colleges and universities as well as other charities with a respected track record offer detailed explanations of charitable trusts and how donors can participate. Most organizations feature these explanations on their Web sites. But don't stop there. Ask for information that you can show your tax adviser and ask questions and gather information before you make a move.



Coan is managing partner with Wealth Planning & Management LLC, a fee-only registered investment advisor, and author of "Asset Protection and Wealth Preservation." Views expressed are the writer's.
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